The capital raised in the first five weeks of 2018, alone, matched deals for all of 2016. And the feeding frenzy has not decelerated, with the overall first quarter of 2018 seeing almost $3 billion in capital raises—more than four times the amount raised in the first quarter of 2017. This is attributable to increases in both the number and size of capital raises: The cannabis industry saw over 160 capital raises (vs. about 100 in 2017) at an average raise size of roughly $15 million (vs. roughly $5 million for 2017), with more than a dozen of these raises bringing in $50 million or more.
The landscape of the cannabis capital markets is also changing. During the early years, investments were often made in the form of high-interest-rate loans, due to investors’ skepticism of industry growth and aversion to risk related to all things cannabis. Now, over 80% of capital raises are equity raises, as a result of investors seeing real potential in an industry where regulatory and other risks are becoming fewer, and public acceptance and support are growing wider. Smaller “cannabis-focused” venture capital funds are popping up around the country at a rapid pace. Mainstream venture capital funds are also finally dipping their toes in the water, as they see extreme upside in a junior industry ripe for investment and in search of the sort of business acumen that a venture capital or private equity fund can provide.
The capital influx has not affected all sectors equally. The cultivation and retail sector has realized the largest capital infusion—four times the amount in year-to-date 2018 as in the same period last year. This has been the sector, which typically involves a company “touching the plant,” to which the industry has been the most averse, since it has presented the highest regulatory risk. As more and more states have legalized cannabis activities (about 95% of Americans now live in a state with a jurisdiction where recreational or medical marijuana, in some form, is already legal), fear and uncertainty from investors has lessened, creating an appetite in this area that, until very recently, was avoided at all costs.
The momentum of legalization and deregulation efforts across the U.S. are such that it would take a very unlikely event to knock the industry off its trajectory. Investors and lenders have been anxiously waiting to do more to capitalize on the boom, given that the legal market is valued presently at around $6 billion per year, with predictions reaching as high as $60 billion in fewer than 10 years.
What this all means for companies in the cannabis sector is that their options for raising funds are becoming more abundant, and on terms more favorable, than ever before.
